Cambridge researchers shed new light on the effects of Brexit

7 January 2017

A recent paper, written by the University's Graham Gudgin and Ken Coutts and Neil Gibson from the Ulster University Economic Policy Centre, suggests that the Treasury’s economic forecasts for the impact of Brexit were "pessimistic rather than realistic." The authors also claim that the Treasury's analysis is "found wanting" and has "little basis in reality."

The Treasury’s predictions, published in April 2016, anticipated an immediate year-long recession in the wake of a win for the LEAVE campaign. Overseen by former Chancellor George Osborne, the official report foresaw a loss to GDP growth of 3.6% over two years, a 12% fall in the value of the pound, an increase in unemployment of half a million, and inflation jumping by 2.3% within a year. The Treasury also warned that Brexit could lead to a loss of GDP of 7.2% by 2030.

Entitled 'The Macro-Economic Impact of Brexit', this paper uses the new Centre for Business Research (CBR) macro-economic model of the UK economy to explore potential consequences of the referendum decision to leave the EU and concludes that “the impact of EU membership on UK trade is much less than suggested by the Treasury”. The academics add: "Writing five months after the referendum result, only one of the Treasury’s expectations has been clearly realised. This is the fall in the value of sterling."

The authors suggest that the Treasury’s “unstable” methodology is to blame for the discrepancy between their two economic predictions, saying that the Brexit estimates "provide virtually no information directly about UK trade with the EU" and are instead based on "cross-sectional averages across a range of countries at different dates."

These conclusions are expected to serve as a boost to the “Vote Leave” camp, and to those who originally attacked the Treasury and Remainers, labelling their predictions as intentionally pessimistic in order to scare people into voting to stay in the EU, nicknamed 'Project Fear'.

However, the CBR itself warns in its working paper that the conclusions should not be taken at face value. There are a number of assumptions at play, which, while likely, are far from certain. These include that Theresa May will prioritise immigration controls and manage to reduce net migration to around 165,000 from 2020 and that an eventual free trade deal with the EU will be negotiated.

The authors also advise against using their results as a rosy looking-glass for Britain’s economic progression in the coming years. In reality, there will most likely be a return of inflation and sluggish wage growth and real wages are estimated to be only slightly higher in 2025 than they were in 2004.

The paper concludes that “the economic outlook is grey rather than black, but this would, in our view, have been the case with or without Brexit. The deeper reality is the continuation of slow growth in output and productivity that have marked the UK and other western economies since the banking crisis."